Debunking Economics - Supplement

Debunking economics The Naked emperor deThroNed?
supplemeNT
Steve Keen
Zed Books
London | new York
This supplement to Debunking Economics Revised and Expanded Edition: The Naked Emperor Dethroned? was first published in 2011 by Zed Books ltd, 7 Cynthia street, london N1 9 jf , uk and room 400, 175 Fifth avenue, New York, Ny 10010, usa The first edition of debunking economics was first published in the united kingdom and the united states of america in 2001 by Zed Books ltd, and in australia by pluto press australia ltd. www.zedbooks.co.uk/debunking_economics www.debunkingeconomics.com www.debtdeflation.com Copyright steve keen 2011 The right of steve keen to be identified as the author of this work has been asserted by him in accordance with the Copyright, designs and patents act, 1988 artwork by philip armstrong set in monotype plantin and FontFont kievit by ewan smith, london all rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of Zed Books ltd.
supplemeNt | 3
16 14 12 10
Inflation
Unemployment
Percent
1 us inflation and un employment from 1955
8 6 4 2 0 -2 -4 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
16 14 12
Pecent of GDP
2 Bernanke doubles base money in five months
10 8 6 4 2 0 1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
300
250
Percent of GDP
200
1930 level
150
100
3 private debt peaked at 1.7 times the 1930 level in 2009
50
0 1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
4 | debuNkiNg ecoNomics
20 18 16 14 Utils 12 10 8 6
Utils Change in utils
4 rising total utils and falling marginal utils from consuming one commodity
4 2 0 1 2 Bananas 3 4
5 Total utils from the consumption of two commodities
0
3 2 Bi sc
2
Utils 8 16
24
1 uit s
na Bana
Utils 8 16
24
2.4
6 Total utils repres ented as a utility hill
1.8 Bi
sc
1.2 uit s
1.8
2.4
3.0
0.6
0.6 0
1.2
as anan
supplemeNt | 5
Utils 8 16
24
2.4
1.8 Bi
sc
1.2 uit s
1.8
2.4
3.0
0.6
0 0
0.6
1.2
nas Bana
7 The contours of the utility hill
2
.7 20
Biscuits 1
17 .2
8 Indifference curves: the contours of the utility hill shown in two dimensions
3
.8 13
1 Bananas Z X Biscuits
Y W Bananas
9 a rational con sumers indifference map
Z X Biscuits B
10 Indifference curves, the budget constraint, and consumption
Y W C Z X A Bananas
Biscuits B
Y
11 deriving the demand curve
q1
q2 I
q3 II III Bananas
Price of Bananas
p1
p2 p3
q1
q2
q3
Bananas
supplemeNt | 7
Z Y X B Biscuits
q1
q2 q3
12 upwardsloping demand curve
Bananas
Price of bananas
p3 p2 p1
q1 q2 q3
Bananas
Biscuits
a
AC
13 separating out the substitution effect from the income effect
Bananas
a) Necessity b) Inferior
All other goods
Bananas c) Luxury d) Neutral
Bananas
14 engel curves show how spending patterns change with increases in income
Bananas
Bananas
Biscuits
II
III
15 straightline engel curves

Bananas
1200
Price and marginal revenue
900
Marginal revenue
600
16 economic theory cannot rule out the possibility that a mar ket demand curve may have a shape like this, rather than a smooth, downwardsloping curve
300
Marginal cost
Demand
-300 0 100 200 300 400 Bananas 500 600 700 800
supplemeNt | 9
8000 7000 Thousand dollars 6000 5000 4000 3000 2000 1000 Monopoly profit Profit 0 5000 10000 15000 20000 25000 Total revenue
Maximum profit Monopoly quantity
Total cost
17 profit maximization for a monopolist: marginal cost equals marginal revenue, while price exceeds marginal cost
0 Output 1200 1000 800 Dollars 600

Monopoly quantity
De
Marginal cost
an
dc
ur
ve
Monopoly profit
Monopoly price
l na gi e ar u M ven re
400 200 0 0
Average cost
Monopoly cost
5000
10000
15000
20000
25000
Output
18 profit maximization for a perfectly com petitive firm: marginal cost equals marginal revenue, which also equals price
Firm revenue, cost and profit

80000 70000 60000 Dollars 50000 40000 30000 20000 10000 0 0 50 100 150 Firm output 200 250
Total revenue
qPC
Total cost Maximum profit ProfitPC Profit
The procedure: 1 Market sets equilibrium price 2 Price taking firm sets marginal revenue equal to marginal cost 3 Profit maximized
The firm
1000 800 Dollars Dollars 600 Demand 400 200 0 0 5000 10000 15000 Market quantity 20000 25000 PPC QPC 1000 800 600 400 200 0 0 50
The firm
qPC
Supply
Marginal cost Competitive price
100 150 Firm output
200
250
(a) Marginal cost D1 D2 (b)
Price
Price
S1
S2
S1
S2
Marginal cost
D2 D1 MR1 MR2 Quantity
19 a supply curve can be derived for a competitive firm, but not for a monopoly
Quantity
The market
1200 1000 Dollars per unit 800 600 400 200 0 Marginal revenue 0 5000 10000 15000 Output 20000 PPC Price PM QM QPC Marginal cost (Supply)
20 a competitive industry produces a higher output at a lower cost than a monopoly
25000
The competitive firm

1000 800 Dollars per unit Billions dollars 600 400 Price = Marginal revenue 200 0 0 50 100 150 Firm quantity 200 250 Marginal cost qPC 8 7 6 5 4 3 2 1 0 0
Market revenue, cost and profit levels

QM QPC
Total cost
Total revenue
Maximum profit
Profit
5000
10000 15000 Output
20000
25000
a) Perfect competition
Price Price Supply
b) Monopoly
Marginal cost
21 The standard supply and demand explanation for price determination is valid only in perfect competition
Pe
Pe Demand Demand Marginal revenue Qe Quantity Qe Quantity
supplemeNt | 11
Farm (a) Area 1 square mile Fence 4 miles long
22 double the size, double the costs, but four times the output
Farm (b) Area 4 square miles Fence 8 miles long Four times the area; twice the fencing cost
1200
Monopoly prediction
1000 800 Price 600 400

23 predictions of the models and results at the market level
Monopoly outcome 100 firms prediction 100 firms outcome
Marginal cost
Marginal revenue Demand
200 0 0 5000 10000 15000
20000
25000
Output
140
Neoclassical
120
Firm 1
Firm's output
Mean
100
Keen
Firm 2
80
24 output behavior of three randomly selected firms
Firm 3
60 0 20 40 Iterations 60 80 100
40000
Keen
36000
Firm 96
32000
Firm's output
Average of all firms

28000
Firm 76
24000
Neoclassical
25 profit outcomes for three randomly selected firms
20000
Firm 66
16000 0 20 40 Iterations 500 5 60 80 100
400
Output 000s
300
200
26 product per additional worker falls as the number of workers hired rises
100
Marginal product
0 0 200 400 Labor 600 800
0 1000
1000
800
600
Labor
400
200
27 swap the axes to graph labor input against quantity
0 0 100 200 Output 300 400 500
Marginal product 000s
Output
supplemeNt | 13
1200
Total cost and total revenue 000s
1000
800
Total revenue
600
400
Total cost
28 multiply labor input by the wage to convert Yaxis into monetary terms, and add the sales revenue
0 100 200 Output 000s 300 400
200
1200
300
1000
Total revenue
200
Total cost and revenue
800
100
600
Total cost
400
-100
Profit/loss
200 -200
0 0 100 200 Output 300 400
-300
1000
20
Workers hired times wage
800
16
600
12
Total variable cost

400 8
200
Marginal cost
0 0 100 200 Output 300 400
0 500
Marginal cost
30 deriving marginal cost from total cost
Profit/loss
29 maximum profit occurs where the gap between total cost and total revenue is at a maximum
20 Price 16 Average fixed cost Average variable cost
Marginal cost
12
Marginal cost
31 The whole caboodle: average and marginal costs, and marginal revenue
0 0 100 200 Output 300 400
Price
Supply
Demand Quantity
Total cost revenue
32 The upwardsloping supply curve is derived by aggregating the marginal cost curves of numerous competitive firms
Re
ta To l co sts b ria Va le co sts
Fixed costs Wheat output Average cost
Marginal revenue
33 economic theory doesnt work if sraffa is right
Average cost & revenue
Marginal cost qmin Wheat output
ve
nu
supplemeNt | 15
Price/ bushel
Dq2 Dq3 Dq1 ? ?
Supply ?
Price?
34 multiple demand curves with a broad definition of an industry
Q1 Q 2 Q 3 Quantity?
Wheat
500
400
Sraffa output
300
Output
Neoclassical output
200
35 a farmer who behaved as economists advise would forgo the output shown in the gap between the two curves
100
0 0 200 400 600 Labour input 800 1000
100
100 minus unemployment rate

90
Percent
80
Capacity utilization
70
36 Capacity utilization and employment move together
60 1967 1971 1975 1979 1983 1987 1991 1995 1999
2003 2007 2011
Price/bushel
De
an
Equilibrium price
Supply
37 Costs determine price and demand determines quantity

Equilibrium quantity Wheat
Average cost
Average cost & revenue
38 a graphical representation of sraffas (1926) preferred model of the normal firm
Price
Marketing costs
Target markup Marginal cost
Wheat output
Target output
Output
B Labor
39 The economic theory of income distribution argues that the wage equals the marginal product of labor
Marginal product/Real wage
Mar gin al p rod uc to fl

Real wage
or ab
B Labor
supplemeNt | 17
Wheat output
40 economics has no explanation of wage determination or anything else with constant returns
Labor input with constant labor/land ratio
Marginal product/Real wage
Marginal product of labor
Real wage
Revenue from sales
Labor
Labor
Price
Marginal revenue
Demand Quantity
41 The demand for labor curve is the marginal revenue product of labor
Marginal revenue product/Real wage
inal rev arg enu M e
pr od uc t
RW1 RW2
or lab of
E1
E2
B Labor
Income W3 y3 W2 y2 W1
42 The individuals incomeleisure tradeoff determines how many hours of labor he supplies
y1 h 3 h2 Leisure h1 Work Time (24 hours)
Income
W2 W1 h3 h 2 h 1
W2 W1
43 an upwardsloping individual labor supply curve
24-h2 24-h1 24-h3
Wage
Supply
Demand
44 supply and demand determine the equilibrium wage in the labor market
Labor s
upply
W3
Wage
Labor
supplemeNt | 19
Wage
Supply Wm We
Demand
Ld
Le
Ls
45 minimum wage laws cause unemployment

Labor
Wage
Supply
Wp Wa
Demand
46 demand management policies cant shift the supply of or demand for labor
Lf Income Labor
W3
W2 y3 y2 W1 y1 h1 Leisure h2 h3 Work
47 Indifference curves that result in less work as the wage rises

Time (24 hours)
W3 Wage Labor supply
W3 Income
W2 W1
48 labor supply falls as the wage rises
W2 W1
h 1 h2 h3 Leisure
Time (24 hours) Work 24-h3 24-h2
Hours 24-h1
W3 W3 Income Wage
Labor supply
W2
W2
49 an individual labor supply curve derived from extreme and midrange wage levels
W1
W1
h1
Leisure
h2
h3
Work
24-h3
24-h2 24-h1
Hours
Wage
Demand Supply
We Wm
50 an unstable labor market stabilized by minimum wage legis lation
Le Ldm Lsm
Labor
supplemeNt | 21
Wage
Equilibrium wage? DE3 DE1
DE2 ? ? ?
Labor supply
Demand for labor
51 Interdependence of labor supply and demand via the income dis tributional effects of wage changes
E1 E2 E3 Labor Equilibrium employment?
Output
Capital
Price
Profit rate
52 The rate of profit equals the marginal product of capital

Quantity
Marginal revenue product of capital
PR1 PR2
C1
C2
Capital
Profit rate
Supply
53 supply and demand determine the rate of profit
Demand
Capital
0.3
Actual profit rate
0.2
0.1
54 The wage/profit frontier measured using the standard commodity
0.0 0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Wages (fraction of surplus)
Price
Supply
P2 P1
D2
55 standard neo classical comparative statics

Q1 Q2
D1
Quantity
supplemeNt | 23
X displacement X with .01% different Y
5 X displacement
56 sensitive dependence on initial conditions
-5
10
Time
20
30
Z displacement 16.0 24.0 8.0

10
57 unstable equilibria
.0 di 5.0 sp la 0.0 ce m -5 en .0 t
-4.0
X dis
0.0 place
4.0 ent m
8.0
Employment rate and wages as a fraction of output
1.1
1.0
0.9
0.8
58 Cycles in employment and income shares
0.7 0
Employment rate 10 20 Years 30
Wages share 40 50
1.1
1.0 Wages share
0.9
0.8
59 a closed loop in employment and wages share of output
0.7 0.85 0.87 0.89 0.91 0.93 0.95 0.97 0.99 1.01
Employment rate
I (income)
60 derivation of the downwardsloping Is curve
Savings
i
Interest rate
Investment a function of interest rate
I (income)
Savings a function of income
Ix = S(I)
i
IS cu rve
Multiplier
C(
i)
Ix (Investment)
I (output)
supplemeNt | 25
Interest rate Interest rate
Exogenous money supply The LM curve
61 derivation of the upwardsloping lm curve
Md2 (I2) Md1 (I1) Money I1 I2 Income
LM
Interest rate
IS
62 reconciling keynes with the Classics
Keynesian region
Classical region
I (output)
10 9 9 9 9 9 9 9 9 99 6 l 6 6 9 6 6 66 9 6 u u6 66 6 6 66 6 6 66 6 66 6 66 666 9 66 66 69 6 96 9 9 6 9 9 66 9 6 999 9 9 6 9 6 9 99 66 s 9 666 9 9 9 66 9 9 99 9 9 966 66 6 9 9 99 9 99 96 96 99666 66 99 6 9 6 666 9 6 966666666 6 6 9 66 9 6 6 6 966666 9 9 999 99 9 6666 6 9 99 66 6 9 99 9 99 99 9 9 99 6 66 99 99999 9 966 9 9 99 9 9 99 99 9 9 99 9 9 99 6 19601970 l Jan 1970 u Lucas 9 9 -5 2 3 4 5 Unemployment 6 7 8 19501960
Inflation
0
63 unemployment inflation data in the usa, 195072
June 1972
15 9 H 9 9 9 9 9 9 9 n 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 99 9 9 9 99 9 9 9 9 9 9 9 9 9 9 9 9 9 9 99 9 9 9 9 9 9 9 9 9 9 99 666 666 l 9 6 999 9 96 6 6 6 u u 9 6 6 6 6 99 6 6 6 9 9 66 9 9 6 6 6 6 9 6 66 6 6 6 66 9 9 9 6 9 9 6 6 96 9 9 66 999 6 6 9 99 6 s 9 9 66 9 6 9 66 6 9 9 9 6 6 6 6 6 6 6 69 9 6 9 9 66 6 6 96 9 69 6 6 69 6 6 6 6 6 6 6666 6 69 9 6 6 6 6 69 6 6 6 69 6 6 6 6 6 6 9 9 9 96 2 4 6 Unemployment 8 10
10
Inflation
5
64 unemployment inflation data in the usa, 196080
6 9
19601972 19721980
l s
Jan 70 Jun 72
u n
Lucas Jan 75
Jan 80
Rate of interest
Supply
65 supply and demand in the market for money
Demand
Quantity
Risk
Capital market line
66 The capital market line

Pure interest rate Expected rate of return
supplemeNt | 27
Risk (r)
I Z C D B II III
IO
A
67 Investor preferences and the investment opportunity cloud

Expected rate of return (ER)
(r)
C* F B* G C B
IO
A A* P (ER)
68 multiple investors (with identical expectations)
(r) Z
IO
69 Flattening the IoC

(ER)
12
Change in M0
Percent
-4
-8
70 Inflation and base money in the 1920s
Inflation
1925 1926 1927 1928 1929 1930 1931 1932
-12 1924
20
Grey area indicates periods of recession
10
Percent p.a.
71 Inflation and base money in the postwar period
-10
-20 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
12
Percent p.a.
Nominal
4
72 Bernankes massive injection of base money in Qe1
After inflation
-4 2005
2006
2007
2008
2009
2010
2011
supplemeNt | 29
30 0
Unemployment
20 6
10
Percent p.a.
0 18 -10
Change in M1
24
73 Change in m1 and unemployment, 192040
-20
-30 1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
30 1940
30
Change in M0
20
Change in M1
Percent p.a.
10
-10
74 Change in m0 and m1, 192040
-20 1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
0.5
0.4
0.3
0.2
75 m0m1 correlation during the roaring Twenties
0.1 -12 -8 -4 0 Lag in months 4 8 12
Percent
12
0.6
0.4
0.2
0.0
-0.2
76 m0m1 correla tion during the Great depression
-0.4 -12 -8 -4 0 4 Lag in months 8 12 16
120 100 80
Percent p.a.
77 Bernankes quantitative easing in historical perspective
60 40 20 0 -20 1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
120 100
12 10
Change in M0 percent p.a.
60 40 20 0 -20 2002
Inflation rate
4 2 0 -2 2011
78 Change in m1 and inflation before and during the Great recession
2003
2004
2005
2006
2007
2008
2009
2010
Inflation percent p.a.
80
Change in M0
supplemeNt | 31
2500
M0
2000
$ billion
1500
M1
1000
Currency
500
79 The money supply goes haywire
0 2007
2008
2009
2010
2011
10 Percent change 4th qtr to 4th qtr 8 6 4 2
Actual growth
Target range
80 lindsey, orphanides, rasche 2005,p. 213
1976
1977
1978
1979
16 14 12
M3
Ratio to M0
10 8 6 4
M2
M1
81 The empirical money multiplier, 19602012
2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
40
30
M0
20
M1
M 2 M1
Percent p.a.
10
82 The disconnect between private and fiat money during the Great recession
-10
Private debt
M 3 M2
-20 2008
2009
2010
2011
Growth of output 30 Wage Share 25 Output 20 15 10 5 0 0 20 40 Year Employment Cycle 0.95 0.90 0.85 Wage Share of Outut Employment Rate 60 80 100
Employment-Wages Share Cycle 1.0 0.9 0.8 0.7 0.6 0.85 0.90 0.95 Employment
Wage Share Cycle 1.0 0.9 0.8 0.7 0.6
10
15 20 Year
25
30
10
15 20 Year
25
30
83 Goodwins growth cycle model
supplemeNt | 33
A Great Moderation? 500 400 Output 300 200 100 0 5 10 15 Year 20 25 30 1000 Output (billion) 800 600 400 200 250 260 270 280 Year 290 300 Followed by a Breakdown
Employment Cycle with Debt Wage Share of Output Employment Rate 1.0 0.9 0.8 0.7 0.6 0 50 100 150 Year 200 250 300 0.9 0.8 0.7 0.6 0
Wage Cycle with Debt
50
100
150 200 Year
250
300
84 my 1995 minsky model
0.9
Wages
0.8
0.7
85 Cyclical stability with a countercyclical government sector
0.6
0.86
0.88
0.90
0.92 Employment
0.94
0.96
0.98
140
120
Percent
100
Ratio
80
60
Exponential fit
86 australias private debttoGdp ratio, 19752005
40 1980 1985 1990 1995 2000 2005
300
60000
250
50000
Debt ratio percent of GDP
200
40000
150
30000
100
Debt level
20000
50
10000
87 us private debt
0 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
30
Debt financed demand

20 2
Percent of GDP
10
-10
88 The correlation of debtfinanced demand and unemployment
-20
Unemployment rate
10
-30 1970
12 1975 1980 1985 1990 1995 2000 2005 2010
U-3 unemployment rate
Debt level US$ billion
Debt ratio
supplemeNt | 35
0.8
Correlation coefficient
0.6
Employment
0.4
GDP
0.2
89 Correlation of credit impulse and change in employment and Gdp
0 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12
20 16 12
Average 19552008
Percent p.a.
90 relatively constant growth in debt
8 4 0 -4 -8 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
30
20
Percent of GDP
91 Growing level of debtfinanced demand as debt grew faster than Gdp
10
-10
-20 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
20 15 10 5
19992011
Percent p.a.
0 -5 -10 -15
19201940
92 Change in nominal Gdp growth then and now
-20 -25 0 2 4 6 8 10 12 14 16 18 20 Years since 1920 and 1999 25 20 15 10
19201940
Percent p.a.
5 0 -5 -10
19992011
93 real Gdp growth then and now
-15 -20 0 2 4 6 8 10 12 14 Years since 1920 and 1999 16 18 20
20 15 10
Percent p.a.
19992011
5 0 -5 -10
19201940
94 Inflation then and now
-15 0 2 4 6 8 10 12 14 16 18 20 Years since 1920 and 1999
supplemeNt | 37
30
25
19201940
20
Percent
15
U-6 rate 19992011
10
19992011
95 unemployment then and now
0 0 2 4 6 8 10 12 14 Years since 1920 and 1999 16 18 20
200
50000
150
19201940
40000
$ billion
100
30000
19992011
50 20000
96 Nominal private debt then and now
0 -10 -8 -6 -4 -2 0 2 4 6 8 10
10000
190 180 170
19992011
19201940
Index start value = 100
160 150 140 130 120 110
97 real debt then and now
100 90 0 2 4 6 8 10 12 14 Years since 1920 and 1999 16 18 20
$ billion
300
19992011
250
Percent of GDP
200
19201940
150
98 debt to Gdp then and now
100 -10 -8 -6 -4 -2 0 2 4 6 8 10 Years relative to peak debt (1929 and 2009) 20
15
10
Percent p.a.
19201940
-5
99 real debt growth then and now
19992011
-10 -10 -8 -6 -4 -2 0 2 4 6 8 Years after private debt growth stopped (1930 and Jun 2009) 10
160 140 120
Business
Finance
Percent of GDP
100 80 60 40
Households
100 debt by sector business debt then, household debt now
20 0 1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
supplemeNt | 39
10 5 0
Percent of GDP
-5 -10 -15 -20
19201940
20002011
-25 101 The Credit Impulse then and now -30 -10 -8 -6 -4 -2 0 2 4 6 8 10 Years after credit impulse hit zero (1928 and Jun 2008) 30 0
20
Unemployment rate
Percent of GDP
10
10
15
-10
20
-20 102 debtfinanced demand and unemploy ment, 192040 -30 1921
25
30 1924 1927 1930 1933 1936 1939
30

20 5
Percent of GDP
10
10
Unemployment rate
0 15
-10
20
103 debtfinanced demand and unemploy ment, 19902011
-20
25
-30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
30
U-6 unemployment rate
Unemployment rate
10 -90
-30 0 30
Percent of GDP
-5 60 -10 90
Unemployment
104 Credit Impulse and change in unemployment, 192040
-15
120 150
-20 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932
180
10
-90
-30 0
Percent of GDP
Unemployment
-5
30 60
-10
90 120
105 Credit Impulse and change in unemployment, 19902010
-15 150 -20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 180
-0.2
Correlation coefficient
-0.4
-0.6
-0.8
106 The Credit Impulse leads change in unemployment
-1 -12 -8 -4 0 4 8 12 Lag in months (with quarterly data)
% change in U-3 unemployment rate
-60
% change in U-3 unemployment rate
-60
supplemeNt | 41
107 a nineteenthcentury private banknote
100
Loans
80
60
$
40
Vault
20
108 a credit crunch causes a fall in deposits and a rise in reserves in the banks vault
0 0 2 4 6 8 10 Years 12 14 16 18 20
100
80
Firm deposits
60
$
40 20
Worker deposits
0 0 2 4 6 8
Safe
10 Years 12 14 16 18 20
6 5 4 3 2 1 0 Bank bailout Firm bailout Worker bailout
109 a bank bailouts impact on loans
-1 10 12 14 16 18 20
40
30
Bank bailout Firm bailout Worker bailout
20
10
110 a bank bailouts impact on incomes
0 10 12 14 16 18 20
3.0
2.5
$ million p.a.
2.0 No bailout Bank bailout 1.5 Firm bailout Worker bailout 1.0 0 2 4 6 8 10 12 14 16 18 20
111 a bank bail outs impact on bank income
supplemeNt | 43
120
100
80
Double repayment, half creation/recycling
60
40
112 Bank income grows if debt grows more rapidly
20
Standard values
0 0 2 4 6 8 10 Years 12 14 16 18 20
150 No bailout 140 Bank bailout Firm bailout 130
$
120 110
113 loans grow more with a debtor bailout
100 10 12 14 Years 200 No bailout 195 Bank bailout Firm bailout 16 18 20
190
$/year
114 profits do better with a debtor bailout
185
180
175
170 10 11 12 13 14 15 Years 16 17 18 19 20
6.00 No bailout Bank bailout 5.50 Firm bailout 5.25
5.75
$/year
115 Bank income does better with a bank bailout
5.00
4.75
4.50 10 11 12 13 14 15 Years 16 17 18 19 20
10000
$/year
116 modeling the Great moderation and the Great recession output
1000
100 0 10 20 30 40 Date 50 60 70
120 100
Workers
80
Percent of GDP
60 40
Capitalists
20
117 Income dist ribution workers pay for the debt
0 -20 0 5 10 15 20
Bankers
25 30 35 40 45 50 55 60
supplemeNt | 45
66 5
64
Finance profits
Wages
62
60
58
118 actual income distribution matches the model
56 1980
0 1985 1990 1995 2000 2005
1.5 1.3 1.1 0.9 Random 0.7 0.5 0.3 0.1
119 lemming population as a constant subject to exogenous shocks
-0.1 -0.3 -0.5 0 20 40 60 80 100 Year 120 140 160 180
1.0 0.9 0.8 0.7 Formula 0.6 0.5 0.4 0.3 0.2
120 lemming population as a variable with unstable dynamics
0.1 0.0 0 20 40 60 80 100 Year 120 140 160 180
FIRE profits share of GDP
Wages percent of GDP

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Debunking Economics - Supplement

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Debunking economics The Naked emperor deThroNed?

3 private debt peaked at 1.7 times the 1930 level in 2009

5 Total utils from the consumption of two commodities

7 The contours of the utility hill

9 a rational con sumers indifference map

10 Indifference curves, the budget constraint, and consumption

12 upwardsloping demand curve

13 separating out the substitution effect from the income effect

All other goods

Bananas c) Luxury d) Neutral

15 straightline engel curves

Price and marginal revenue

0 Output 1200 1000 800 Dollars 600

Firm revenue, cost and profit

Total cost Maximum profit ProfitPC Profit

Marginal cost Competitive price

100 150 Firm output

D2 D1 MR1 MR2 Quantity

20 a competitive industry produces a higher output at a lower cost than a monopoly

The competitive firm

Market revenue, cost and profit levels

10000 15000 Output

Pe Demand Demand Marginal revenue Qe Quantity Qe Quantity

Farm (a) Area 1 square mile Fence 4 miles long

1000 800 Price 600 400

Monopoly outcome 100 firms prediction 100 firms outcome

Marginal revenue Demand

200 0 0 5000 10000 15000

24 output behavior of three randomly selected firms

Average of all firms

25 profit outcomes for three randomly selected firms

16000 0 20 40 Iterations 500 5 60 80 100

0 0 200 400 Labor 600 800

27 swap the axes to graph labor input against quantity

0 0 100 200 Output 300 400 500

Marginal product 000s

Total cost and total revenue 000s

Total cost and revenue

0 0 100 200 Output 300 400

Workers hired times wage

Total variable cost

0 0 100 200 Output 300 400

0 0 100 200 Output 300 400

Total cost revenue

33 economic theory doesnt work if sraffa is right

Average cost & revenue

Marginal cost qmin Wheat output

34 multiple demand curves with a broad definition of an industry

0 0 200 400 600 Labour input 800 1000

100 minus unemployment rate

36 Capacity utilization and employment move together

60 1967 1971 1975 1979 1983 1987 1991 1995 1999

2003 2007 2011

37 Costs determine price and demand determines quantity

38 a graphical representation of sraffas (1926) preferred model of the normal firm

Target markup Marginal cost

Marginal product/Real wage

Mar gin al p rod uc to fl

Labor input with constant labor/land ratio

Marginal product/Real wage

Marginal product of labor

Revenue from sales

Marginal revenue product/Real wage